Should Policy in a Monetary Union be based on Union Aggregates?
In a standard New-Keynesian sticky-price model of monetary policymaking, we show that formulating the policy objective of a monetary union in terms of a weighted average of objectives for inflation and output in each of the member countries, instead of union-wide aggregate inflation and output, can have an important impact on the effective weight each member country carries in policymaking. This has implications for how fluctuation costs are distributed among member countries, and whether or not monetary policy contributes to harmonize inflation and output across the union.
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